The Impact of Aging Populations

Posted 04.20.04

NOVA

Ever since Paul Ehrlich's The Population Bomb and related books began appearing in the 1960s, many have worried about a population explosion on Earth. Yet even as populations have exploded in many parts of the developing world, they have begun to implode in many industrialized countries. Here, Paul Hewitt, deputy commissioner for policy at the Social Security Administration and former director of the Center for Strategic and International Studies' Global Aging Initiative, talks about how rapidly aging populations in places like Japan and most European countries could begin to destabilize the global economy.

"Its coming, and it's going to change everything," Paul Hewitt says of the major demographic shift that is beginning to occur throughout the world. EnlargePhoto credit: Courtesy Social Security Administration

“Old” countries

NOVA: You've talked about how America is bracing itself for the baby boom retirement generation to come through, but, in fact, other parts of the world are aging much more rapidly than America is.

Hewitt: That's true. Our median age over the next 50 years is likely to rise about three, three and a half years, but the median age of the rest of the world will rise considerably more. For Mexico, it will rise by 20 years. By 2045, according to the U.N., Mexico will be an "older" country than America. Korea will be an "older" country than America by 2015, China by 2025, Thailand and Vietnam by 2035.

Japan is the "oldest" at the moment, right?

Yes. Japan is currently the "oldest" country in the world. In 1950, it was one of the "youngest" countries in the world; it had a median age of 22. Now its median age is 41, and by 2025 it will be approaching 50. What's happened in Japan is a combination of low immigration and birthrates that are more than one third below the "replacement level"—that is, the number of births a society needs to have enough children to replace the people who die.

As a consequence, you get a demographic structure where there are fewer and fewer children as a percentage of the total population, and the median age rises. And, of course, the senior population in Japan is also soaring, because the Japanese enjoy the highest life expectancy in the world.

What will happen to the world's second-largest economy as its population begins to age and decline?

Well, it won't be the second-largest economy very long; China will be. In any case, it's difficult to say how aging and depopulation will affect Japan's economy, but let's look at a couple different ways it might.

First, there is the problem of shrinking numbers of workers. Beginning around 2010, the workforce decline will average about 1 percent a year for at least 20 to 30 years. A nation's economic output, its Gross Domestic Product (GDP), is the number of workers times the average income per worker. With a labor force shrinkage of about 1 percent a year, Japan could see long recessions lasting a decade or more. You might see the real incomes of workers rising during that period, but rising income per worker won't necessarily make up for the contractionary effect of a shrinking labor force on GDP.

"We’re going to see the decline of Europe and Japan as economic and political powers."

The other way that aging and depopulation will affect the economy is that there will be shrinking numbers of consumers. Consumer spending accounts for two-thirds of Japanese GDP, and it hasn't grown for many, many months. There are some indications that this is starting to turn around in the current cyclical recovery, but we're looking at the prospect of very low domestic consumption growth going forward.

The third way that aging might affect economic growth is that older people aren't as innovative, technically savvy, or willing to take risks as younger people. So we could have shrinking economies with shrinking numbers of workers and consumers, and an older, less innovative, less well-educated workforce. All of these factors could combine to create tremendous economic adversity.

And not just in Japan, right? Japan's not the only country facing this.

Right. Japan is the "oldest" country in the world, but there are a number of countries that are catching up. In a few years, Italy's population will be older than Japan's. Japan's birthrate is about 1.38 today, and that's about one-third below the level of replacement. Italy's birthrate until recently was 1.1, which is basically half the replacement rate. So the momentum for population decline and hence aging in Italy is much greater.

Germany has about the same birthrate as Japan. Its population has started to shrink, even with immigration. All of Eastern Europe faces very similar types of issues. Bulgaria has a birthrate of 1.2. All of Eastern Europe, plus Russia, can look forward to median ages of 50 or more by mid-century. Huge portions of the developed world are facing this challenge, but so too are countries that we don't think of as being "old," like China, whose very rapidly aging society is struggling to avoid becoming the first country that gets old before it gets rich.

Is this demographic shift something that can be avoided or averted?

The demographic shift is now set in concrete. It's coming, and it's going to change everything. For one thing, we're going to see the decline of Europe and Japan as economic and political powers. They will become cauldrons of permanent economic and fiscal crisis. Anybody who's looked at the news over the past year knows that it's been a period of constant pension reform in these countries. We have entered what is going to be a constant cycle now, a constant drumbeat of reforms.

These fiscal crises have geopolitical consequences. Europe already is too broke to help govern the state of the world, to do many things that vital and powerful countries do. This financial crisis will become more consequential for America for as far into the future as we can project, because we know that our key trading partners, for all intents and purposes, are finished as economic and military powers.

“Young” countries

For those of us brought up with the idea of a population explosion, all this seems pretty shocking.

Indeed. If you go back and look at concerns of the 1960s, there are all these horrendous book titles like The Population Bomb. The primary source of concern in intellectual circles about population then was, and in some places continues to be, the population explosion.

The West's overreaction to this concern has now left it with just the opposite problem. It's like having a diet in which at first you eat too much salt, then you don't eat enough. Either way, the result could be fatal. In the case of Europe and Japan, we really see countries that had always been powerful but had always been young, and now demography dictates that they will become old and not very powerful. They're having a hard time getting used to that fact.

"Of the 25 youngest countries in the world, 18 have had major civil conflicts since 1995 alone."

Who will take their place?

The locus of global growth and dynamism will shift to the emerging markets, countries like China and India. For the United States, this creates a series of huge challenges. How do we bring along these countries, which by necessity must be our principal allies as we go forward, to create world stability? How do we transform them from the defensive mindset of the Third World to a more expansive role of taking responsibility for global events? Because we're certainly going to need them.

In any case, we know that the economies of the West will shrink, while the economies of the emerging markets rise. The capabilities of the West will shrink, while the capabilities of the emerging markets rise. We're looking at a period of tremendous instability, of great challenge, and, possibly, of great danger.

Young countries could potentially see economic and political upheaval in the coming decades as well, right?

Yes. In 1950, the difference in median age between Japan and Yemen, today the world's "oldest" and "youngest" countries, was just 2.7 years. Today it's about 27 years, and by 2025 it'll be 35 years. Yemen's median age will be 34 years younger than Europe's. We are facing a widening global generation gap, a difference in sensibility and perspective, that has never been experienced before.

Both sets of countries on either side of this gap will be sources of tremendous global crisis. The aging countries because they could easily have a fiscal crisis that undermines global growth and prosperity by wrecking the capital markets. The national debt in Japan, for example, is inching up close to 200 percent of GDP; at this rate, it will be 300 percent of GDP by 2012. No economy has ever survived the kind of debt that Japan is loading on its shrinking number of children. All of this creates a potential hazard for the rest of the world.

On the other side of the generation gap, you have these very, very young countries, places like Saudi Arabia, Iraq, Yemen, Afghanistan, most of sub-Saharan Africa, where the typical person is a teenager. Most people in these societies have yet to reach their reproductive age, which means that their real population explosions have yet to occur.

A country like Yemen today, with a population of 18 million, could balloon to 158 million people by mid-century. This on a little spit of land with only three rivers that flow year-round that, up until 50 years ago, never had more than four million people on it. Yemen's population explosion makes it inevitable that per-capita incomes will fall, public services will deteriorate. Conflict will result, because this is what happens in overpopulating societies with too many young people. Of the 25 youngest countries in the world, 18 have had major civil conflicts since 1995 alone. If you want to know where the world's future conflicts will be, look at the youthful countries.

“Middle-aged” countries

And what countries lie in the middle between old and young?

In the middle you have a number of countries like China, India, and Mexico that are beginning to age fairly rapidly and that are struggling to get rich before they get old. These countries are the emerging markets that have brought their birthrates down and are continuing to bring them down so that women are free to participate in labor forces, so that families can spend more on children's education, health care, and so forth. This is the "virtuous circle" of rising per-capita incomes and social stability that we hear about.

Places like China are seizing this opportunity to make the most of the demographic window, that period between when they're very young and when they're old. China is doing very well, but so are other countries, such as India and Thailand. Brazil now looks like it's starting to make the move. Keeping the world economy stable so that these countries can become engines of global growth is extremely important, probably the largest foreign policy challenge that America will face over the next generation.

How can we help these countries become engines of growth?

The good news about the aging of the global economy is that you have a number of countries that are saving for their retirement, that have accumulated huge amounts of pension wealth and other kinds of financial wealth and won't be able to use it, because there's no internal investment demand, because there aren't that many profitable growth opportunities in the economies that aren't growing.

"It is our lack of aging that makes the United States ‘the island of tranquility in a turbulent demographic sea.’"

Where will this money go? A lot of it will go to the emerging markets, where working-age populations are very large and where productivity is very low, and where infusions of capital and technology can generate huge returns. The win-win situation is that our pension money will help these emerging-market countries grow. At the same time, we will be able to get a little bit of that back in the form of remittances and have good returns on our investments.

The good news is that there is complementarity between the emerging markets and the aging industrial countries, provided that we're smart enough to seize the opportunities. The dangers are that we will allow ourselves to get into deep and unfathomable pension crises, or that we won't step forward and defend global growth and stability where it's necessary to do so. In either case, the ensuing crisis could upset the applecart.

The United States

What about the U.S.? You've said it will be an island of tranquility. What do you mean by that?

Well, I was referring to the fact that our median age is not projected to rise very much over the next 50 years. It is our lack of aging that makes the United States "the island of tranquility in a turbulent demographic sea." But this doesn't mean we won't have huge demographic issues to deal with. No other developed country will see as large a percentage increase in the elder population as the United States, because our baby boom was larger than anybody else's. Yet we will continue to have lots and lots of young people to support them. Not enough to keep Social Security solvent, but certainly enough to make us relatively young compared to the other developed countries.

Whereas Europe and Japan can expect to see a median age rising to 50, rising about 11 years over the next century, America's will rise by about three years to nearly 39. So in a sense, this reflects the great success of America. Our young people feel confident enough to have children, whereas they don't in other rich countries. And we also welcome immigrants. This is a place where immigrants feel much more welcome than in the more tribal societies of, say, Germany or Italy.

Do we have to worry about aging here?

I think we have to worry a great deal about aging in America. Our pension problems are potentially just as great as Europe's. Their pension crises are being driven by a dearth of children and, of course, future workers. America's population is increasing fairly dramatically, and we will see our working-age population increase as well over the next 50 years. But our senior population, as we baby boomers age, will truly explode. I think this will become a major problem if we don't get our hands around the financial implications of that shift.

Is our population growth expected to slow down? And will that cause us to age more rapidly?

Our population growth is going to be about 1 percent a year, which is pretty much what it's been over the last half-century. This is a society that believes very much in growth. Our economy works like a bicycle: if it's not going forward, it's not going to do very well.

Population growth makes a big difference. Let me give you an example. Let's assume that all of the industrial countries have worker productivity grow by 1 percent a year. In 50 years, Italy's economy will be 21 percent larger, Japan's will be 36 percent larger, America's will be 300 percent larger. This difference is all the result of different rates of labor force growth.

You had said that after about 50 years we will begin to age in earnest. How is that?

America's relative period of youth, our lack of aging over the next 50 years, is the by-product of a growing population. Today, we're about 300 million; by mid-century, we'll be something like 450 million. Eventually, however, we'll start to look like India. We'll be bumping into each other, we'll be so overcrowded. Population growth has to slow down, whether it's the population growth we have through higher rates of fertility or the population growth that results from immigration. At some point it will be necessary for our population to stabilize, and when a population stabilizes, as life expectancy increases you get more aging.

Meanwhile, the donor countries that provide America's immigrants will eventually run out of surplus youth. I suspect that immigration from Mexico, for example, will probably slow down to a trickle by the 2020s. Mexico is on its way to becoming an older population than the United States, and this is true of all Latin America. So our major sources of immigration are aging very rapidly, much more rapidly than we are. You have to assume that someday the immigration will slow down, and when that happens, we'll age more rapidly.

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